Tri-Continental Directors Turn Deaf Ear on Wake-Up Call

INDEPENDENT directors are supposed to act as the voice of shareholders. Whether they do so or merely endorse management is a matter of concern to mutual fund regulators, who are looking more closely at the issue.

Though regulators have not singled out any funds, a big fund that has attracted considerable attention from shareholders and industry observers is the Tri-Continental Corporation, a diversified closed-end fund. Managed by the J.& W. Seligman Company, the fund has performed poorly even while fighting shareholder requests to change its structure, leaving some investors to wonder whether the directors are asleep at the wheel.

''The bottom line is that management only cares about accepting their jobs and advisory fees, not the best interests of shareholders,'' said Jack N. Bonne, a disgruntled shareholder in Pound Ridge, N.Y.

At the fund's annual meeting on Thursday in Boston, Mr. Bonne and other shareholders offered proposals for change. Management opposed the measures, which were all defeated. Brian Zino, president of Tri-Continental and director and president of J.& W. Seligman, declined to comment on Friday. Calls to several Tri-Continental directors were not returned.

The performance of Tri-Continental, which buys stocks of big American companies and has grown to $2.7 billion in assets since its beginning in 1929, is nothing to brag about. It returned an average of 10.03 percent a year for the 10 years that ended last month. That compares with a 14.10 percent average annual return for the Standard & Poor's 500-stock index.

What makes the weak showing especially galling to some shareholders is that they cannot receive the full underlying value of their shares if they sell them.

While mutual fund shareholders can redeem shares at the net asset value any time from the company, owners of closed-end funds can sell theirs only on stock exchanges. A poor performer like Tri-Continental tends to sell at a discount to the value of its underlying assets. Simply put, no one wants to pay full price for damaged goods.

Though the net asset value of a Tri-Continental share was $31.89 on May 9, the fund was trading on the New York Stock Exchange at just $26.25 on Friday, representing about a 17 percent discount. That means shareholders who want out will receive less than $83 for every $100 worth of stock in the portfolio. Last year, the discount averaged 18 percent, and it has been 14 percent a year on average since 1975, according to Morningstar Inc., the Chicago fund researchers.

Tri-Continental's management could do several things to reduce or eliminate the discount. The easiest would be to convert to an open-end mutual fund. Several funds have recently decided to do just that, including Paine Webber's Global Income Plus, Alliance Global Environment, Smith Barney's Inefficient Market and T. Rowe Price's New Age Media. Prudential Securities just announced that its Global Total Return and Global Government funds would also become open-end funds.

In such a conversion, the fund company agrees to begin redeeming and issuing new shares based on investor demand at a specified date. The discount tends to disappear gradually as that date approaches, though the company could be forced to expend considerable capital to buy the shares.

Another way to trim a discount is to buy back shares and bolster the market price. Several closed-end funds undertook big repurchase programs last year. They include General American Investors, Kemper's Growth Fund of Spain and four MFS funds.

The Securities and Exchange Commission has been warning companies to make sure that investors get their money's worth out of closed-end funds, in effect encouraging such steps.

The Tri-Continental fund's management has stated that it does not want to convert to an open-end fund because it would then have to worry about redemptions, which could hamper performance.

And instead of repurchasing shares to trim its discount, the Tri-Continental directors pushed through a $192 million rights offering back in 1992. In a rights offering, shareholders receive the right to buy new shares at a discount. This dilutes the value of the existing shares. But the sponsor gets new money, giving it a bigger asset base from which to draw management fees.

Mr. Bonne, who inherited 9,000 shares of Tri-Continental from his father, has been pressing for broad change for three years. Last year, he presented a proxy proposal to convert the fund to open-end status, and it received about 16 percent of the shareholder vote. This year, he got about 15 percent. He has been joined in his efforts by four other shareholders, who submitted proxy proposals ranging from a conversion to an index fund -- which would presumably lead to better performance and lower fees -- to a ban on the issuance of additional shares as long as shares are trading at a discount.

The tug-of-war between fund management and Mr. Bonne has turned nasty. Last year, Tri-Continental tried to block his proposal from a shareholder vote by pointing to an S.E.C. rule that limits measures to 500 words. His was 504 words. And this year, the company attempted a similar block, citing typographical errors, among other things, and giving Mr. Bonne little time to make the corrections. In both instances, the S.E.C. came to Mr. Bonne's aid.

Given that he owns more stock in the fund than half of the 12 directors, based on the fund's April 14 proxy, Mr. Bonne says he wonders just whose side the directors are on anyway.

Investors' main protection is the Investment Company Act of 1940, which governs funds. It was drawn up after closed-end-fund scandals of the 1920's and sought to assure investors that their interests would be protected by independent boards.

Though he declined to comment on the Tri-Continental case in particular, John Rekenthaler, publisher of Morningstar Mutual Funds, said board practices often leave something to be desired. ''In reality, a lot of boards clearly don't spend much time worrying about shareholders, but just rubber-stamp management's plans,'' he said.

The S.E.C. chairman, Arthur Levitt Jr., has made investor protection his mantra and recently voiced concern about how directors act on issues like management fees. Mr. Levitt said that fund examinations had generally shown directors to be conscientious, but that fund examiners would continue to look closely at the issue.

Despite Tri-Continental's troubles, several financial analysts recommend its shares. They say that the fund, managed by Charles C. Smith, is buying stocks and sectors that are poised to do well and that over the long term, the discount should shrink.

Ed McRedmond, senior closed-end fund analyst with A. G. Edwards, said, ''We like the fund's focus on large-cap stocks, and the large discount gives us a potential added kicker should it narrow over time.''